Puerto Rico Tel. Co. v. Sprintcom, Inc.

• Citation: 54 Communications Reg. (P&F) 561,662 F.3d 74
• Decision Date: 09 November 2011
• Docket Number: 10–1610.,Nos. 10–1609,s. 10–1609
• Parties: PUERTO RICO TELEPHONE COMPANY, INC., Plaintiff–Appellant/Cross–Appellee, v. SPRINTCOM, INC., Defendant–Appellee/Cross–Appellant,Telecommunications Regulatory Board of Puerto Rico; Sandra E. Torres–López, in her official capacity as President of the Telecommunications Regulatory Board of Puerto Rico; Gloria Escudero–Morales, in her official capacity as Associate Member of the Telecommunications Regulatory Board of Puerto Rico; Nixyvette Santini–Hernández, in her official capacity as Associate Member of the Telecommunications Regulatory Board of Puerto Rico, Defendants, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

54 Communications Reg. (P&F) 561

662 F.3d 74

PUERTO RICO TELEPHONE COMPANY, INC., Plaintiff–Appellant/Cross–Appellee,

v.SPRINTCOM, INC., Defendant–Appellee/Cross–Appellant,Telecommunications Regulatory Board of Puerto Rico; Sandra E. Torres–López, in her official capacity as President of the Telecommunications Regulatory Board of Puerto Rico; Gloria Escudero–Morales, in her official capacity as Associate Member of the Telecommunications Regulatory Board of Puerto Rico; Nixyvette Santini–Hernández, in her official capacity as Associate Member of the Telecommunications Regulatory Board of Puerto Rico, Defendants, Appellees.

Nos. 10–1609

10–1610.

United States Court of Appeals, First Circuit.

Heard March 11, 2011.Decided Nov. 9, 2011.

Scott H. Angstreich, with whom Jeffrey M. Harris and Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., were on brief for appellant/cross-appellee.

Miguel J. Rodríguez–Marxuach, with whom Alexandra Rodríguez–Díaz and Rodríguez Marxuach, PSC, were on brief for appellee/cross-appellant.

Robert F. Reklaitis, with whom Leslie Paul Machado and Leclair Ryan, were on brief for defendants/appellees.Before TORRUELLA, SILER,^* and HOWARD, Circuit Judges.

TORRUELLA, Circuit Judge.

This appeal arises out of disputes between plaintiff-appellant/cross-appellee Puerto Rico Telephone Company, Inc. (“PRTC”) and defendant-appellee/cross-appellant SprintCom, Inc. (“Sprint”) concerning the intercarrier compensation due under an interconnection agreement (the “Agreement”), which they entered into in June 2000. PRTC and Sprint both appeal from the district court's decision in P.R. Tel. Co., Inc. v. Telecommns. Regulatory Bd., 704 F.Supp.2d 104 (D.P.R.2010), where the court upheld an order of the Telecommunications Regulatory Board of Puerto Rico (the “Board”) adjudicating the disputes at issue. On appeal, PRTC argues that the Board's order violated federal law and misinterpreted the Agreement insofar as it mandated that—pursuant to the terms of the Agreement's change-of-law provision—PRTC and Sprint were to reciprocally compensate each other for internet-service-provider-bound (“ISP-bound”) traffic in accordance with the interim compensation regime set forth by the Federal Communications Commission (“FCC”) in the ISP Remand Order.¹ Sprint, on the other hand, cross-appeals from the district court's decision upholding the Board's dismissal of Sprint's claims on a separate (albeit related) dispute in which Sprint alleged that PRTC had overcharged it for the termination of transit traffic. For the reasons stated below, we reverse in part and affirm in part the district court's decision and remand for further proceedings consistent with this opinion.

I. Regulatory Background

We provide some background of the regulatory framework under the Telecommunications Act of 1996 (the “1996 Act”) ² to set up the issues on appeal. Some of our prior cases provide further background as to the general operation of this statute. See, e.g., Centennial P.R. License Corp. v. Telecomms. Regulatory Bd., 634 F.3d 17 (1st Cir.2011); Global NAPs, Inc. v. Verizon New Eng., Inc. (“ GNAPs VI ”), 603 F.3d 71 (1st Cir.2010), cert. denied sub nom., Gangi v. Verizon New Eng., Inc., ––– U.S. ––––, 131 S.Ct. 1044, 178 L.Ed.2d 864 (2011); Global NAPs, Inc. v. Verizon New Eng., Inc. (“ GNAPs V ”), 505 F.3d 43 (1st Cir.2007); Global NAPs, Inc. v. Verizon New Eng., Inc. (“ GNAPs IV ”), 489 F.3d 13 (1st Cir.2007); Global NAPs, Inc v. Verizon New Eng., Inc. (“ GNAPs III ”), 444 F.3d 59 (1st Cir.2006); Global NAPs, Inc. v. Mass. Dep't of Telecomm. & Energy, (“ GNAPs II ”), 427 F.3d 34 (1st Cir.2005); Global NAPs, Inc. v. Verizon New Eng., Inc. (“ GNAPs I ”), 396 F.3d 16 (1st Cir.2005).

Prior to the enactment of the 1996 Act, telephone services were provided mainly by incumbent local exchange carriers (“LECs”) who operated as state-regulated monopolies. See Centennial P.R. License Corp., 634 F.3d at 21. In order to end the local telephone monopolies and promote competition, the 1996 Act, inter alia, removed all state barriers to entry, see 47 U.S.C. § 253, mandated that all telecommunications carriers interconnect with one another, see id. § 251(a)(1), and imposed special obligations on incumbent LECs to mitigate their dominant market position, including the duty to share their telecommunications facilities and services with their rivals ( i.e., competing LECs), id. § 251(c)(2). See Centennial P.R. License Corp., 634 F.3d at 21.

“Interconnection ³ allows customers of one LEC to call the customers of another, with the calling party's LEC (the ‘originating’ carrier) transporting the call to the connection point, where the called party's LEC (the ‘terminating’ carrier) takes over and transports the call to its end point.” Verizon Cal., Inc. v. Peevey, 462 F.3d 1142, 1146 (9th Cir.2006). To ensure that each LEC is fairly compensated for these calls, the 1996 Act requires all LECs (both incumbent and competing) “to establish reciprocal compensation arrangements for the transport and termination of telecommunications.” 47 U.S.C. § 251(b)(5); see also 47 C.F.R. § 51.703. Under a reciprocal compensation arrangement, “each of the two carriers receives compensation from the other carrier for the transport and termination on each carrier's network facilities of telecommunications traffic that originates on the network facilities of the other carrier.” 47 C.F.R. § 51.701(e).

An assumption behind this reciprocal compensation system was that traffic back and forth on these interconnected networks would be relatively balanced such that no carrier would disproportionately benefit from the reciprocal payments. See GNAPs V, 505 F.3d at 45; ISP Remand Order, 16 FCC Rcd. at 9162 ¶ 20. The rise of “dial-up” internet access, however, disturbed this balance and created an opportunity for classic regulatory arbitrage.⁴ See GNAPs V, 505 F.3d at 45; ISP Remand Order, 16 FCC Rcd. at 9162 ¶ 21. Specifically, because internet service providers (“ISPs”) receive a high volume of calls and typically originate very few calls, some LECs began to heavily solicit ISPs as customers ( e.g., by providing free services or even paying their ISP customers) so that such LECs would collect, instead of pay, reciprocal compensation. See GNAPs V, 505 F.3d at 45. This created a number of market distortions that hurt competition. ISP Remand Order, 16 FCC Rcd. at 9162 ¶ 21.

The FCC ⁵ first addressed the issue of reciprocal compensation over ISP-bound calls in February 1999, when it promulgated a short-lived ruling—later vacated by the Court of Appeals for the District of Columbia Circuit—that classified ISP-bound calls as non-local calls that did not qualify for reciprocal compensation under 47 U.S.C. § 251(b)(5). In the Matter of Implementation of the Local Competition Provisions in the Telecommun. Act of 1996, 14 FCC Rcd. 3689, 1999 WL 98037 (1999) [hereinafter, “ ISP Order No. 1 ”], vacated, Bell Atl. Tel. Cos. v. FCC, 206 F.3d 1 (D.C.Cir.2000). The FCC said, however, that because “the [FCC] [had] no rule governing inter-carrier compensation for ISP-bound traffic, parties [could] voluntarily include this traffic within the scope of their interconnection agreements under sections 251 and 252 of the [1996] Act, even if these statutory provisions [did] not apply as a matter of law.” ISP Order No. 1, 14 FCC Rcd. at 3702 ¶ 22. The FCC added that “pending adoption of [an FCC] rule establishing an appropriate interstate compensation mechanism,” it had “no reason to interfere with state commission findings as to whether reciprocal compensation provisions of interconnection agreements apply to ISP-bound traffic.” Id. at 3702 ¶ 21. The D.C. Circuit, however, vacated ISP Order No. 1 and remanded to the FCC, holding that the FCC had not satisfactorily explained its analysis for classifying ISP-bound calls. See Bell Atl. Tel. Cos. v. FCC, 206 F.3d at 9.

On remand, the FCC issued (in April 2001) the ISP Remand Order in which the FCC reexamined the grounds for its previous conclusion that 47 U.S.C. § 251(b)(5) did not mandate reciprocal compensation for ISP-bound traffic. See ISP Remand Order, 16 FCC Rcd. at 9164 ¶ 30. This time using a different reason,⁶ the FCC again “conclude[d] that ISP-bound traffic was not subject to the reciprocal compensation provisions of section 251(b)(5).” Id. at 9167 ¶ 35. In addition, the FCC found that it had the authority under 47 U.S.C. § 201 to establish rules governing intercarrier compensation for ISP-bound traffic. Id. at 9175 ¶ 52. Pursuant to this authority, the FCC stated that it would examine the desirability of adopting a uniform intercarrier compensation mechanism applicable to all traffic exchanged among telecommunications carriers, and, in that context, would examine the merits of a “bill and keep” ⁷ compensation regime for all traffic, including ISP-bound traffic. Id. at 9181 ¶ 66. The FCC, however, concluded that—in order to address the then existing market distortions and avoid a “flash cut” to a new compensation regime—an interim solution was necessary. Id. at 9186 ¶ 77. Thus, under the ISP Remand Order, the FCC imposed an interim intercarrier compensation regime for ISP-bound traffic (the “ISP Remand Order Compensation Regime”) comprising a hybrid mechanism that included, inter alia, the following.

(1) Rate caps. The FCC imposed declining caps on intercarrier compensation rates for ISP-bound traffic, starting at $.0015 per minute-of-use (“mou”) on the effective date of the ISP Remand Order and stabilizing, 36 months thereafter, at $.0007 per mou, id. at 9186–87 ¶¶ 77–78.

(2) Mirroring Rule. Because the FCC believed “[i]t would be unwise as a policy matter, and patently unfair” to have allowed incumbent LECs to benefit from lower rates for intercarrier compensation of ISP-bound traffic (for which incumbent LECs were usually net-payors), while they benefitted from higher rates for traffic subject to reciprocal compensation under 47...